Consumer Bankruptcies March Upward, With More to Come

Bankruptcies are continuing their march to their highest level since 2005 as more and more middle class families are added to the rolls, according to reports from the American Bankruptcy Institute and a couple of researchers.

According to the American Bankruptcy Institute (ABI), the 135,913 consumer bankruptcy filings in October represented a 27.9 percent increase over the October 2008 monthly total of 106,266. The October 2009 consumer filings represented an 8.9 percent increase from the September 2009 total of 124,790. Chapter 13 filings constituted 28.5 percent of all consumer cases in October, a slight increase from the September rate.

“The nearly 9 percent increase in consumer bankruptcy filings in October, together with a 7 percent jump reported in business cases, demonstrates the sustained stress on the U.S. economy,” said ABI Executive Director Samuel J. Gerdano. ABI forecasts that total bankruptcies this year will exceed 1.4 million, the highest number since 2005.

An increasing amount of the bankruptcies are being filed by middle class Americans, suffering from the perfect storm of the highest unemployment levels since the early 1980s, rapidly declining home equity, tight credit and previously incurred debt, reports USA Today, citing a report from Elizabeth Warren, Harvard Law School Leo Gottlieb professor of law and chair of the Congressional Oversight Panel on the Troubled Asset Relief Program (TARP) and Deborah Thorne, Ohio University associate professor of sociology.

Thorne told insideARM that the study, The Vulnerable Middle Class: Bankruptcy and Class Status, is currently classified as a working paper that is still being revised. The study is part of a book planned for 2010. As a working paper the work is not to be cited, according to Thorne.

But USA Today reported that the study says that 100,000 middle class families each month in 2007 filed for bankruptcy, when the current economic problems were just in their embryonic stages.

“It’s what I call the bankruptcy creep,” said Dan North, Dan North, chief economist at Euler Hermes, ACI a trade credit insurance firm. “Usually in recessions, we see some degree of bankruptcy creep into the middle class, but usually not to the level that this study suggests.”

Homeowners had gotten into the habit of using their homes as ATMs and depending on the additional credit to finance their lifestyles, North said. Many were used to high lines on credit cards and lower charge card rates, too.

But when the escalation of housing prices stopped, and even more so when it started reversing, the available credit started drying up, and much more quickly than many were able to adjust their spending, leading to the jump in bankruptcies, North said.

Bankruptcy filings, like unemployment, is a lagging economic indicator, North added. So he expects the number to keep going up for at least a few months.

However, there are indications that unemployment and bankruptcies could be nearing their zeniths.

A survey released Monday by the National Association for Business Economics expects employment to pick up, though slowly, early next year

“While the recovery has been jobless so far, that should soon change. Within the next few months, companies should be adding instead of cutting jobs,” said NABE President Lynn Reaser, chief economist at Point Loma Nazarene University. Panelists predict a relatively sluggish consumer upturn but look for a sizable housing rebound, low inflation, and further rise in stock prices. Panelists were also optimistic that the Federal Reserve’s policies will not lead to higher inflation. At the same time, NABE panelists are “extremely” concerned about high federal deficits over the next five years.

“Non-farm payrolls should start improving in the first quarter of the year,” North added.